Do Incentives for Quality Matter?

Abstract

We use an unusual dataset involving 14 tomato growers over 4 years to analyze the effect of incentive contracts on behavior in a fixed effects econometric model. We find that growers respond to incentive contracts by improving tomato quality, as predicted by economic theory. The comparison is not confounded by the usual contract endogeneity and simultaneity problems because of characteristics of the processing tomato industry and our dataset. We discuss the implications of our findings for the design of agricultural contracts.